Sharpe Ratio
A measure of risk-adjusted return that divides a portfolio's excess return (above the risk-free rate) by its standard deviation of returns.
Explained Simply
The Sharpe ratio answers the question: "How much return am I getting per unit of risk?" It's calculated as (Portfolio Return - Risk-Free Rate) / Standard Deviation of Returns. A Sharpe ratio above 1.0 is considered good, above 2.0 is very good, and above 3.0 is excellent. A negative Sharpe ratio means the investment returned less than a risk-free Treasury bill. The beauty of the Sharpe ratio is that it penalizes volatility — a strategy returning 20% with wild swings may have a lower Sharpe ratio than one returning 12% with steady gains. This makes it the standard metric for comparing strategies with different risk profiles. The main limitation is that it treats upside and downside volatility equally.
How Tradewink Uses Sharpe Ratio
Tradewink calculates rolling Sharpe ratios for all active strategies and for the overall portfolio. The RLStrategySelector uses Sharpe ratio as a primary fitness metric — strategies with higher risk-adjusted returns receive more capital allocation via Thompson Sampling. The TradeAnalyzer reports Sharpe ratios in performance dashboards, and the system alerts users when their portfolio's Sharpe ratio degrades below 0.5, suggesting strategy adjustments may be needed.
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See Sharpe Ratio in action
Tradewink uses sharpe ratio as part of its AI trading signal pipeline. Start getting signals that use this concept to find real opportunities.